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Brian Fallow suggests cutting the GST rate would have a more stimulatory impact on the economy than the National Party's proposed tax cuts

Brian Fallow suggests cutting the GST rate would have a more stimulatory impact on the economy than the National Party's proposed tax cuts

By Brian Fallow

The tax policy the National Party has announced is economically specious and politically brazen.

It is specious to claim that it is intended to provide stimulus to an economy in recession. Instead it looks like a brazen use of borrowed money to bid for votes in the mortgage belt.

If stimulating spending were the aim the fiscal largesse would be targeted at people with what economists call the highest marginal propensity to consume, that is, to spend every extra dollar that comes their way.

Tax cuts are not an efficient way of doing that. Instead they mainly benefit middle and higher income earners, who pay most of the tax.

On that score it is instructive to look at the distribution of the proposed income tax cuts, achieved by “temporarily” raising thresholds, alongside a helpful table the Treasury produces with each Budget. It breaks down the population aged 16 or older into income bands $10,000 wide and estimates how many people fall into each band.

It’s below and can also be found here.

 At the time of last May’s Budget, the Treasury reckoned more than half of the working age population -- 2.2 million or 56% to be precise -- had less than an annual  taxable income of $40,000.

The most they could get under National’s policy is $8.10 a week.

Around 900,000 would get nothing as their incomes fall below the current bottom threshold of $14,000 so raising it to $20,000 does them no good.

To be fair, nothing is also what Labour’s tax policy offers everyone by way of tax cuts.

National’s threshold adjustments seem designed to deliver the maximum percentage increase (3.8%) at the level of the average wage. That is $64,000 a year if calculated from average weekly earnings per full-time-equivalent employee, including overtime and the public sector, according to the June 2020 quarterly employment survey.

The average wage-earner, so defined, would get $46.50 extra a week.

Those earning more than the average wage -- just over 900,000 taxpayers or one in four -- would see marginal rate of 30c in the dollar up to a top threshold of $90,000, at which point the tax cut is worth $58 a week.

Two other ways of calibrating the scale reinforce the point that this tax relief is not targeted at those who would spend every extra dollar:

The median weekly earnings from wages and salaries in the June quarter just past, according to the household labour force survey,  would deliver an annual income of $55,000 and a tax cut on national’s plan of $25 a week.

The median income from all sources ($652 a week) is squarely back in the $8.10 a week bracket.

When challenged that the tax cuts are skewed to those on higher incomes National’s finance spokesman Paul Goldsmith was unabashed: Tax cuts naturally benefit those who pay the most tax.

Income tax that is. His leader, Judith Collins, when talking about the more generous depreciation provisions for business capital expenditure the tax package also includes, made the point that businesses have to make that investment to gain the tax benefit.

The equivalent reasoning applied to consumption would argue for cutting the GST rate instead of shifting income tax thresholds. Consumers would have to buy stuff to get the benefit.

The International Monetary Fund suggested a year ago that a temporary GST cut is a measure New Zealand should think about if fiscal stimulus were required. The idea got short shrift from the Finance Minister Grant Robertson at the time.

As GST is a regressive tax, a cut aimed there would especially benefit people with a high marginal propensity to consume, aka the poor.

As it is, the minority of the population who would stand to gain the most from National’s policy will not necessarily go out and spend those extra dollars.

Given what we know about the income distribution, especially when people’s peak earning years are, those on above-average incomes are most likely to be found in the one-third of households who are owner-occupiers with a mortgage.

So what would they do with those extra dollars? Is a lack of income keeping them away from the shops, restaurants and bars of the nation?

Or is it caution? If so, putting the money in the bank Is not attractive, when deposit interest rates are already negative in real terms and set to become more so when the Reserve Bank delivers on its threat to take the official cash rate negative.

The risk therefore is that National’s policy would add billions of dollars to the public debt so that people can shave a few thousand off their mortgages, and this fiscal largesse would not touch the sides, in terms of stimulating spending.

How big that risk is only time would tell.

National, of course, does not see tax cuts in those terms.

“We believe that the person earning the money owns the money,” Collins declared when formally launching the party’s election campaign on Sunday.

But while the Government is running a deficit it is fair to describe any policy change which increases the deficit, whether it is revenue forgone or spending increased, as being funded with borrowed money.

And as government debt in practice is never paid back and only ever rolled over, the interest bill on that debt is essentially eternal. The best we can hope for it that it shrinks relative to the size of the economy and the tax take.

And that is why it is unfortunate that we have to put quotation marks around the “temporary” nature of the tax cuts.

It is far easier politically to cut taxes than to put them up again.

As April 2022 approaches and the recovery is still looking tentative and frail, what are the odds we would hear:  “Now is not the time to be raising taxes on hard-working New Zealanders.”

So how temporary the tax cuts would prove to be, and therefore the fiscal price tag attached, remains to be seen.

The big picture is that we have to get used to the idea of paying more tax, not just because of the debt legacy of the current crisis, but because of the fiscal impacts of an ageing population.

As far as latter goes, the IMF reckons that by 2030 superannuation and health care spending will need to rise by 1.5% and 1.7% of gross domestic product respectively.

That is the medium-term fiscal rip that tax cuts now would be swimming against.

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Is it any less politically brazen than announcing $20b of infrastructure spend and leaving a giant question mark over what a huge chunk of it is actually going to be spent on for months?

Plus, we are already paying more tax. Labour cancelled Bill English's legislated tax cuts. No one had the temerity to call this a tax increase at the time, but in effect, it was.

Tax increase. Really gv? It's really not

We're still paying for the last tax cut national implented. The social cost has been huge, yet there seems to be no mainstream interest in analysing this.

We're now in the midst of a global shock not seen in my lifetime. Tax cuts are reckless in the extreme and only benefit the few

Tax cuts will bolster consumption bringing low-value businesses such as retail and hospitality back to life. The effects will be felt for a couple of quarters but those businesses won't survive long enough to matter.
Worse, such a cash splurge will give the artificial impression of an economic recovery, enough for the next government to put the much-needed long-term investment plans, such as shovel-ready projects and upskilling retrenched workers, on hold.

rhetoric comment, with no substance

housing crisis, working homeless, huge homeless population, underfunding of infrastructure on a mass scale, hospitals, education, police etc all struggling. All due to National's 9 years in power, that's what I'm referring to.

While national was in power... $70,000 for a sign outside MBIE.
$380,000 new furniture for MBIE.
$140,000 sundeck for MBIE.
$24,000 fridge for MBIE.
$400 for hair straighteners for MBIE.
$78,000 two doors for parliament.
$363,000 for govt agencies to watch sky tv.
$4000 for a sign for Steven Joyce opening MBIE new building.
MBIE spent $38.9 million on external contractors and consultants
$4000 for a sign Paula Bennett’s office.
$600,000 spent on flowers by National.
$1200 taxi fares.
$4000 a night in hotels.
$80,000 for Grosser’s party in Washington
$17 million paid to a US yacht club.
$11 million paid to a Saudi sheep farmer.
$30 million tax cut for Warner bros.
$30 million tax cut for Rio Tinto.
$6 Billion NOT paid By National in to NZ super fund as part of Govt’s contribution SINCE 2008.
$4 billion tax taken from New Zealand’s super fund.
$200 million invested and lost by our superfund in an overseas bank that was under investigation for fraud before the money was invested.
$2.3 million paid to a banker to give advice to HNZ on how to sell HNZ homes.
Taxpayer paying for beneficiaries to live in short term motels at a cost of $22 million in 7 months.
$700,000 in legal fees fighting a compensation case over abuse that happened in state care.
$45 million bail out media works.
$29 million Social bond program.
$45 million Nova pay.
$27 million paid for a flag referendum that 67% of New Zealanders did not want.
$1.7 Billion bail out SCF.
$200 million lost from buying junk carbon credits.
$6.2 million spent by National for a apartment for one in Hawaii.
$11 million spent by National for an apartment for one in New York.
$86 million to produce new currency that is uncounterfeitable… which has been counterfeited!
$20 Billion NZDF.
$6.4 million spent for new BMWs for ministers.
$4.4M Doing up Government House
$100,000 bribe to get 2 Chinese MPs into the national party
170,000 jobs promised but more than 100,000 Kiwis left to find work in Australia instead

Thanks nzdan

Repealing legislated tax cuts is increasing taxes.

It isn't though, because no one had paid the cheaper taxes.

It isn't "increasing taxes". It's "cancelling a tax cut". They aren't the same thing, and pretending they are just shows your bias.

Right. If at no point any individuals were paying higher tax than they were previously, it can't be claimed that taxes were 'increased.'

So a legislative change lowering tax rates is a tax cut, but a legislative change increasing tax rates isn't a tax increase? Despite both being effected by the same parliamentary mechanism? I would love to say I'm enough of a baller for this to have ultimately made very little difference to my household, but it's sadly not the case - so forgive me for being cynical of this kind of semantic argument. The end result is the same: Kiwis paid more in income tax than they were going to.

No, the lesson is that most people dont know or care about legislative changes that don't actually come into effect - and particularly legislative changes that happen before an election, that are intended to come into effect after an election, when the outcome of the election is far from certain.

And as for the end result: no Kiwi ended up with less money in their pocket than they had before because of tax increases. No Kiwi ended up paying any more in taxes than they did previously. Its disingenuous to tell people their taxes increased when both of these things are true, because of some long winded story about legislation that never actually came into effect, and was passed by a government that knew there was a pretty good chance it would never come into effect.

Yes it really was

No different to announcing $31b of ghost roads. Same thing really.

National did in fact have the temerity to call it a tax increase at the time (loudly and often). This was called out for the sophistry it was. Regardless of how you spin it, preventing a planned decrease in something is not the same as increasing something. If I ring the hairdresser, and book to have two inches trimmed off the bottom of my hair, and then call the next day and cancel, I have not magically caused my hair to increase in length. I simply chose not to go through with plans to cut it.

What I found particularly annoying at the time was that they didn't need to call it an increase. They could have said - honestly - 'you will pay more in taxes under Labour than you will under National' (or some variation). Describing it as a tax increase was cynical scare-mongering.

completely agree. I prefer TOP's policies.


National are appalling economic managers.

They are great for the few they care about.

They are good for capital gain..

There's a strong arguement labor have been as 'good' for that.

Hardly a surprise considering the current style of economic management was brought in by a man who picked it up from a 'successful' career at Merrill Lynch.

The man made a quick buck for his clients (landlords, property speculators, banks, private institutions, tourism operators, hospitality business owners, etc.) while in power. He jumped ship before it all turned to mud for cushy board roles at the companies who profited under him.

He then rode the tourism wave at Air NZ and quit in March 2020 as soon as the bad times started to roll. I expect him to monetise his stock options and resign from ANZ at the first sign of a housing-led financial crisis.

Robertson borrows kids money for the Cullen fund to prop up his financial mates - good.
Key stops borrowing money for the the Cullen fund to prop up his financial mates - bad.

Yes, when you simplify issues to such an extent that all of the actual important differentiating detail is lost, it makes Labour look hypocritical.

If you actually consider all the details that matter, like return on investment vs cost of debt, you'll see that Labour are the better economic managers thinking about the long term, and John Key / National are only interested in the short term and spinning a story they can tell the electorate, and leave Labour to tidy up the mess later. Both parties are kicking the can down the road for dealing with superannuation - but it was Labour that set up the fund to begin paying out in 2036 in the first place, and Labour who has put the most money into it. National keeps undermining those efforts for short-term political expediency.

Absolutely right. It is indeed a wise decision putting borrowed funds into NZSF when it has always returned at margins above to well-above NZ government's borrowing rates.

Taking margin loans in your kids name. Nice. At what point does the Cullen fund get so big we all get a free pony?

Stopping paying into the super fund is one of the most appallingly bad decisions any government could make. National are proposing doing it - AGAIN. We're paying for that through future generations.

Dcnbwz, and your thoughts on Grant R who has already stopped pmt into SuperFund, while telling no one and making no announcement.

Take an hour or two to prepare your thoughts.

As I said - it's an appalling decision. The thing is, National did it voluntarily for no other reason than a tax cut for the wealthy.

So when you say "stopped", you really mean "reduced", right? Very different words with very different meanings.

And it's frankly not even clear that he has.

And if I read the PREFU correctly it's because the payments are calculated/indexed against GDP?

Henry - any comment on what lanthanide and nzdan have mentioned?

I suspect Henry just regurgitates comments he sees on Social Media without knowing exactly what he's talking about.
Refer to page 50 of the PREFU, table 2.5 NZS Fund contributions. -> Click

Also bottom of page 83 states:

NZS Fund: Contributions to the Fund follow the Government’s planned track until 2021/22, after which they revert to values determined by the legislated formula and calculated by the Treasury’s NZSF model using the latest economic and fiscal forecast inputs.

Key instead transferred all the kids money into demands for private debt.

Brian didn't do his homework.

Eh Brian?

I really like Brian Fallow and I usually agree with him but I disagree on this.
Cutting GST would make little difference to people's consumption unless it was a cut to zero, which I don't think is sustainable.
Cutting to say 7.5% is neither here nor there.

I thought as an emergency response to COVID-19, cutting GST to 10%, or 0% temporarily could be an effective way to help businesses.

Basically the government would say supermarkets, petrol stations etc were morally required to drop their prices to account for the tax drop. But smaller businesses would get more of a free pass to keep their prices the same, or maybe only cut them 5-10% instead of the full amount, thus keeping more money in their pockets.

But the wage subsidy was a better idea.

We have only 5% of the population earning over USD100k. And yet we have a nation of landlords. All that tells you is leverage is rife.

NZ should make gains from CG as part of one earning.. so there's less loopholes.

Not really most of these landlords just got lucky. They brought 2 or 3 properties on the suburbs of Auckland in the 80's & 90's which you could do back then with little leverage, good savings & a slightly above average salary.

Oh there are plenty leveraged up the wazoo. I know one person who has 5 rentals all leveraged off each other, I reckon he has a mortgage of a few million. He earns about 75kpa from his job. His initial investment was his own home in central Auckland in 2012. There are many in that situation and worse. I can't get my head around how it's not collapsed at all.

Well, despite the fact that I would benefit significantly from this, I don't want a bar of it. I wouldn't spend it as I have all i need and I feel sure that much of it would be either saved or usd to deuce debt.

"We believe that the person earning themoney owns the money". Sounds ok, but I see it differently. For me to earn money, I need stuff like an education system, infrastructure like roads to enable me to travel, decent legal system to uphold my property and other rights and so on. In other words I need a well functioning society and that has to be paid for, so I don't own all that I earn. Collins is virtually saying that tax is a form of theft.

Good to see my name/demographic mentioned in this article.
I think middle NZ would rather receive tax cuts than a GST cut since a GST cut is unlikely to have much impact as companies likely to just push prices to the maximum possible level regardless.

Also, I and many others buy many things when they are on sale. A shirt at full price reducing from say $100 to say $90 - so what? A coffee reducing from $4 to say $3.70 - so what?

Or do a $1,000 payment to all eligible adults before Christmas, and then do cheaper 'temporary' tax cuts for 12 months instead of 16.

That will help buoy the economy up and will likely make a different for domestic tourism too.

Teehee. If Brian Fallow doesn't like it, then that suggests it might be better than I thought.

Of course, we must not encourage our most productive citizens to, shock, horror, be more productive, now must we? I mean, the private sector might grow! State dependent Bureaucrats might suffer! No, no, no, we want state dependency first and foremost, don't we? Er, don't we?

How awful:
National’s threshold adjustments seem designed to deliver the maximum percentage increase (3.8%) at the level of the average wage.

The 80s are calling Roger. They want you back.

What a lot of mind reading.

Any reading of Thomas Sowell, and most his books will point to empirical evidence that tax cuts work.

Has Brian emperical evidence that they do not.

You have to smile as he describes .. applying reason... , we are lucky to have him.

Glad you enjoy your world Henry. It seems you're very happy with yourself.

interesting graph 66% of people earn less than 50k whom said NZ is not a low wage economy.
i wonder how much of that number is supported by the government in WFF and accom supplement, electricity payment, other payments

The Green's are now without any further doubt the ONLY party with future orientated policy going to this Election.
Labour has set themselves up for a status quo 2nd term, sadly. Nothing in terms of seeking a mandate to put structurally into place. No climate or inequality policy. Sad.
National are not completely comfortable as government in waiting.

You've ignored TOP and the other minor parties.